Monday, December 21, 2015

"What are the factors behind high economic rents?"

From the Washington Center For Equitable Growth:

In research and debates about economic
inequality in the United States, there’s been a resurgence this year in
explanations for rising inequality that emphasize market power and
market imperfections. In a recent piece for the New York Review of
Books, Paul Krugman details how increasing market power seems to be a more attractive story of how inequality became so large in the United States. A paper
that Krugman cites—by Jason Furman, Chairman of the Council of Economic
Advisers, and Peter Orszag of Citigroup—emphasizes the role of “rents”
in contributing to inequality and suggests increasing market power could
be the reason for this trend. But an interesting new paper
from Dean Baker, economist and co-director of the Center for Economic
and Policy Research, proposes a very different reason for why those
rents came about.

First, let’s define economic rents. In
short, a rent is the extra return to an economic agent above what it
would have been able to get under a different set of circumstances. If
you’d be willing to do a job for $10 an hour and I pay you $15 an hour
to do it instead, the extra $5 you’re earning could be considered a
rent. You often hear the term “rent” used when discussing monopolies
because those firms have lots of excess returns due to being the sole
provider of a good.

It’s with this story that Baker lays out a
key role for rents. Baker points to four areas where rents are
pervasive in the U.S. economy: patents and copyrights, the financial
sector, high pay for CEOs and executives, and high pay for professionals
more broadly. What brings these areas together is that the
institutional arrangements in these portions of the economy have not
only created rents, but that these rents disproportionately go to those
at the top of the income ladder. Getting rid of these rents would stop
the “upward redistribution of income.”

The first area Baker highlights—patents
and copyrights—is easiest to understand. Patents and copyrights are
explicitly monopolies created by the government to reward producers of
new research, pharmaceutical drugs, movies, and a number of other types
of intellectual property. Baker argues that these schemes are providing
rents to the intellectual property creators and that other setups could
produce the same amount of research, for example, without producing
these rents.

Baker has a similar argument about the
financial sector: The industry is simply inefficient and takes in income
well above its contribution to the rest of the economy, as other research has shown.

When it comes to the high pay of CEOs and
professionals such as doctors, Baker’s argument is that institutions
have been arranged so that these CEOs and professionals make more money
than their productivity would necessarily predict. CEOs make much more
money than they would if their pay was actually in line with their
contribution to the success of their firm. And professionals would be
paid less well if the government allowed more competition for those jobs
in the form of more highly educated immigrants....MORE